Question

Part 1

Angie Ghent a local prominent Business Angel has expressed a keen interest in Razor Wire Productions ("RWP"), a large manufacturing of industrial fencing products. Angie estimates that RWP will have after tax earnings of $3.5 million in 2020 (year 1), $4.75 million in 2021, and $9.25 million in 2022 (year 3). In 2022 RWP is expected to have about 8.12 ROA, $12 million in total debt, and approximately $14 million in capital assets. Angie intends to value the firm as of year 2022 (her expected timeframe for exiting the investment) and is using an earnings multiple of 9 times. Angie's required rate of return is 60%. The US tax rate is expected to remain constant at 21% for foreseeable future. Ralph Smithson owns RWP. Ralph is the sole owner and has 1.75 million shares of stock. If Angie invests $4 million into the RWP what percentage ownership of RWP should Angie receive in return? HINT: Not all of the data provided in this problem is relevant to the solution.

Part 2

Continuing with the question above, how many shares of stock and at what stock price should be issued to Angie upon closing the deal with Ralph Smithson? For the purpose of this question assume RWP has a fair market value of $23.50 million (this was determined by determining the net present value of RWP's terminal value). DO NOT USE THE ANSWER YOU DETERMINED IN THE QUESTION ABOVE FOR THIS PROBLEM.

Part 3

After several discussions with other investors, Angie has decided to demand dilution protection by insisting that her diluted equity position still provide her a 60% return on investment in the event that future rounds of funding are necessary. In fact Angie now believes that an additional 10% of the company will have to be sold to raise an extra $3.25 million in funds in 2021, and 5% of the company for $3 million in 2022. What % ownership will Angie require now to insure that after the next rounds of funding her ownership position will be protected. For this question assume that RWP has a fair market value of $31 million (determined by discounting of RWPs terminal value). DO NOT USE THE ANSWER YOU DETERMINED IN THE QUESTION ABOVE FOR THIS PROBLEM.

Answer 1

	2020	2021	2022
	Year 1	2	3
1.After-tax earnings	3.5	4.75	9.25
2.Terminal value(9.25*9)			83.25
3.Total after-tax earnings(1+2)	3.5	4.75	92.5
4.PV F at 60%(1/1.6^Yr.n)	0.625	0.390625	0.244141
5.PV at 60%(3*4)	2.1875	1.855469	22.58301
Sum PV in Yr. 0(Sum of Row 5)	26.63
so, Firm value in Yr. 0=	26.63
Angie's investment=	4
% age of ownership of RWP Angie should receive in return(4/26.63)=	15.02%
	or 15%
b. Fair market value of RWP	23.5
No.of shares(in millions)	1.75
Value per share(23.5/1.75)	13.43
No.of shares to be issued to Angie(4000000/13.43)=	297841
c. Fair market value of RWP	31
No.of shares(in millions)	1.75
Value per share(31/1.75)	17.71
No.of shares to be issued to Angie(4000000/17.71)=	225861
% of ownership of Angie=
225861/1750000=	12.91%